John Gorlow
| Oct 13, 2014
Monthly Review
Despite a mid-month surge, as September drew to a close, the S&P 500 erased all of its earlier gains ending down 1.4%. The S&P 500 VIX Short-Term Futures index gained 11%. The S&P Mid Cap 400 and the S&P SmallCap 600 both declined by a significantly wider margin (-5%).
It was generally a poor month for equities around the world. Developed markets declined 3% while Emerging markets declined 7%.
U.S. fixed income indices were weak, as both medium-and long-term treasury yields increased.
Commodities had another sub-par month. Livestock was the only sector of the S&P GSCI to deliver a gain (up 6%). In contrast, Agriculture sectors declined 11%.
Third Quarter Review
The broad US equity market had flat-to-slightly-positive returns for the quarter. Most equity markets outside the US had negative performance in US dollar terms. Currency movements played a role; the dollar appreciated against most currencies.
US Stocks
The broad US equity market recorded slightly positive performance, and large caps significantly outperformed small caps for the quarter. Value underperformed growth across all size ranges, with the exception of micro-cap indices.
International Developed Stocks
International developed broad market indices measured in US dollars underperformed both the US and emerging markets. Large caps continued to outperform small caps. Value underperformed growth across all size segments.
Emerging Markets Stocks
Broad market emerging markets indices outperformed developed markets outside the US. Unlike their developed markets counterparts, small cap indices outperformed large cap indices for the quarter. Value indices outperformed growth indices in large caps but underperformed in small caps.
Select Country Performance
In US dollar terms, the US recorded the highest performance in developed markets as the dollar rose. European countries recorded some of the lowest performance among developed market countries. In emerging markets, Middle Eastern countries posted strong positive returns. However, relative underperformance in the materials and energy sectors negatively affected some of the larger emerging markets countries, which had a bigger impact on emerging markets indices.
Real Estate Investment Trusts
REITs lost ground for the quarter in the US and non-US markets.
Commodities
Commodities turned broadly negative during the third quarter. The Bloomberg Commodity Index fell 11.83%. Corn had the worst quarter overall, returning -25.78%. Sugar and soybeans also led the decline, returning -21.14% and -21.08%, respectively. Coffee, the biggest gainer, returned 7.95%. Live cattle was up modestly, returning 5.34%.
Fixed Income
Interest rates across all US fixed income markets were mixed during the third quarter. The 10-year Treasury note ended the period at 2.49%, generally unchanged from the previous quarter. The 30-year Treasury bond finished with a yield of 3.21%, registering a decline of 13 basis points. While intermediate- and long-term rates declined, short-term rates increased. The 5-year Treasury note ended the period at 1.78%, up 16 basis points, while the 2-year Treasury note was up 13 basis points, finishing at 0.59%.
Long-term corporate bonds returned just 7 basis points in the quarter but are ahead 11.30% for the year. Intermediate-term corporate bonds lost 14 basis points in the quarter but are still ahead 3.47% for the year.
Municipal revenue bonds slightly outpaced municipal general obligation bonds by 1.97% vs. 1.48% for the quarter. Long-term municipal bonds continue to outperform all other areas of the curve, returning 2.69% for the period and 13.01% for the year.
Overall in spite of a rocky ride the MSCI All country world index ended the quarter with 4.16% YTD returns. The Barclays US Aggregate Bond Index, for its part, finished the quarter with 4.10% YTD returns.
Granted, the stock market will always fluctuate but the savvy investor puts volatility and losses into a greater context. In sum, he or she remains focused on diversification and remains invested for the long-term.